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Signs of Predatory Lending with Sub-Prime Mortgages
The "subprime mortgage" market has made home ownership possible for many people with less than perfect credit and for others who otherwise can't qualify for prime, conventional loans. However, because sub-prime loans are largely unregulated by the federal government, some lenders engage in predatory lending practices. Lenders engaging in predatory loan practices are known as "predatory lenders".
Predatory lending describes fraudulent, unfair and deceptive mortgage loan practices which strip borrowers of home equity and lead to higher instances of foreclosure. The Center for Responsible Lending estimates that predatory mortgage lending costs Americans more than $9.1 billion each year. Are you a victim? Here are some common signs:
Excessive Fees: Because points and fees are generally financed, it's easy to downplay or otherwise hide them. Typical origination fees and points amount to about 2% of the loan. Total points and fees of 4% or more if the loan is for $20,000 or more are considered excessive.
Prepayment Penalties: Less than 2% of prime market loans contain them, but 80% of sub-prime loans do. A common example of a prepayment penalty is six months’ interest on prepayments made in the first five years of a loan, which can cost thousands of dollars.
Excessively High Interest: If the loan carries an interest rate of 6% or more than the yield for Treasury securities of the same term, it's a sign of predatory lending. To put that in English, on April 13, 2001, the yield for 30-year Treasuries was 5.59 percent. Add 6.5 percent to that and you get 12.09 percent. So in May 2001, a high-interest loan on a 30-year mortgage would be defined as having an interest rate of 12.09 percent or higher. It's predatory if it involves fraudulent sales practices, it refinances another high-interest loan and doesn't offer the borrower a better deal than the old loan or it carries a "balloon payment" at the end of the term.
Kickbacks to Brokers (yield spread premiums): On many subprime mortgage loans, brokers receive a kickback from the lender known as a & yield spread premium". The higher the interest rate, the more the more the broker gets. This costs borrowers an additional $800 to $3,000 per loan.
Loan Flipping: Some mortgage originators refinance borrowers' loans repeatedly in a short period of time, charging high fees each time.
Other practices include, adding unwanted loan insurance products (insurance packing), requiring mandatory arbitration and the practice of steering and targeting--steering those who are perceived as less financially sophisticated into sub-prime loans. Fannie Mae has estimated that up to half of borrowers with sub-prime mortgages could have qualified for loans with better terms.